HSBC Profit Falls, Money Laundering Fines & Higher Costs To Blame

HSBC Holdings plc (NYSE:HBC) (LON:HSBA) announced Monday a 52 percent fall in the third-quarter net profit, down to $2.5 billion, compared to $5.2 billion a year earlier. Excluding the impact of disposals and changes in the value of its own debt, HSBC reported an underlying profit of $5.0 billion, up from a revised $2.2 billion a year earlier. The bank’s underlying operating expenses increased by 16 percent, due to higher compliance and regulatory costs. Chief Executive Stuart Gulliver expects to surpass his target of cutting annual costs by $3.5 billion, after saving $3.1 billion already, in a three-year restructuring plan.

Europe’s biggest bank by market value also announced plans of setting aside a further $1.15 billion to cover potential U.S. fines for failing to stop money-laundering in its Mexican unit and to compensate its UK customers for mis-selling payment protection insurance. Of these $1.15 billion of provision, $800 million is for the U.S. money-laundering investigation, and $353 million to compensate U.K. customers, raising the total estimated cost for payment protection insurance to $1.8 billion.

“It could be significantly higher,” Chief Executive Stuart Gulliver told reporters on a conference call, saying the latest provision was based on discussions with the various U.S. authorities involved in the probe.

A research report from Investec expects an extra $0.3 billion of provision in the money laundering case. The report said, the “actual incremental of charge of $800m is perhaps unsurprising, given the wide-ranging charge sheet HSBC Holdings plc (NYSE:HBC) (LON:HSBA) faces and recent “fine inflation” by US regulators”. Claiming the overall results not so bad for HSBc, the report says “We would argue that after adjusting for FVOOD (-$1.7bn), money laundering (-$0.8bn) and mis-selling (-$0.4bn), the only real area of market disappointment should (as always) be revenues”.

The money laundering issues have engulfed the bank since the acquisition of Mexican company, Grupo Financiero Bital, in 2002. In 2007 and 2008, a U.S. Senate investigative committee claimed that the bank’s Mexican unit transferred “illegal drug proceeds” of about $7 billion in cash to the United States.

“The report undoubtedly caused considerable reputational damage to HSBC Holdings plc (NYSE:HBC) (LON:HSBA). The extent to which that has resulted in loss of business is hard to measure, but it has undoubtedly damaged our brand,” Gulliver said.

The bank also revealed that it may face criminal charges in the money laundering case. “The U.S. authorities have substantial discretion, and prior settlements can provide no assurance as to how the U.S. authorities will proceed in these matters,” the bank said. Earlier this year, HSBC Holdings plc (NYSE:HBC) (LON:HSBA) paid a fine of $28 million (379 million Mexican pesos) to Mexican authorities for non-compliance with money laundering controls.

A research report from Bank of America Corp (NYSE:BAC) maintains its Underperform rating on the stock and says, “Overall, the results are a headline beat, but driven by a lower-quality provision release and lower run-off charges”.